Risk On/Risk Off Face-off

By: Doug Noland | Sat, Feb 25, 2017
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The DJIA rose 11 straight sessions ("longest streak since the Reagan administration") to end the week at a record 20,822. The S&P500 gained 0.7% this week (up 5.7% y-t-d), its fifth consecutive weekly gain. The Morgan Stanley High Tech Index's 0.5% rise increased y-t-d gains to 11.5%. Already this year the Nasdaq Composite has gained 8.6%. The Nasdaq100/NDX added 0.3% this week (up 9.9%). Bullish analysts continue to point to strong market momentum.

It's an unusual backdrop where "Risk On" powers a U.S. equities markets melt-up, while safe haven assets trade as if "Risk Off" is lurking right around the corner. Ten-year Treasury yields declined 10 bps this week (to 2.31%) to the lowest level since November 29th. UK yields sank 14 bps (to 1.08%) to lows since October. Gold added $22 this week to $1,257, trading to the high since the election. Silver jumped 2.0% to $18.41, increasing y-t-d gains to 15%. The yen gained 0.6% this week, increasing y-t-d gains versus the dollar to 4.3% (and near a key technical level).

Elsewhere, it appears some favored trades are performing poorly - with popular longs lagging and popular shorts outperforming. The financials continue to lag, while the out-of-favor Utilities surged 4.1% this week. Defensive stocks outperformed this week, while "Trump reflation" wagers underperformed. Low beta outperformed high beta. The small caps underperformed again this week. Meanwhile, the Treasury bond bears are running for cover. All in all, it would appear Market Dynamics continue to frustrate many hedge fund strategies.

At this point, Europe remains at the epicenter of The "Risk On"/"Risk Off" Face-off. Major European equities indices reversed lower into this week's close. After trading to the highest level since 2015, Germany's DAX index dropped 1.6% during Thursday's and Friday's sessions. Italian equities fell 2.2% this week, and Spanish and French equities posted modest declines. The European Bank Stock Index (STOXX 600) dropped 3.2% this week, trading to the lowest level since early-December. Notably, Italian banks sank 5.8% this week, boosting y-t-d losses to 10.4%.

Through the eyes of the global bond market, something just doesn't look right. And while this week's Treasury and gilt yield declines were curious developments, the real action continues to unfold in Europe. German bund yields declined a notable 12 bps this week to 0.18%, the low since December 29th. Even more intriguing, German two-year sovereign yields sank 14 bps this week to a record low negative 0.96%.

The French versus German two-year sovereign spread traded as high as 49 bps this week, the widest since the tumultuous summer of 2012. This spread widened 11 bps for the week (to 43bps), and has doubled thus far in February. The Italian to German 10-year spread widened 12 this week, back to a two-year high 201 bps. The Spanish to German 10-year spread surged 18 bps this week to a seven-month high 151 bps. After beginning the year at 37 bps, the French sovereign Credit default swap (CDS) traded Thursday above 70 for the first time since August 2013.

Markets clearly fret approaching French elections (first round April 23, second May 7). National Front candidate Marine Le Pen is widely expected to win the first round but then lose in May's two candidate runoff. After Brexit and Trump, markets this time around are less willing to take things for granted. Le Pen is running on a far right platform that includes exiting the EU, returning to the French franc and adopting various "France First" measures. Having watched post-Brexit and post-Trump non-turmoil, perhaps French voters will disregard what has become routine fearmongering.

While markets see a Le Pen Presidency as a relatively low-probability (Citigroup says 20%), there is recognition that such an outcome would be highly market disruptive. Many would view a National Front upset as the beginning of the end of the euro monetary experiment.

February 23 - Reuters (Brian Love and Michel Rose): "France's presidential race took a new turn on Thursday as independent Emmanuel Macron raised the curtain on a partnership with veteran centrist Francois Bayrou to help him beat the far-right's Marine Le Pen. 'Political times have changed. We cannot continue as before. The National Front is at the gates of power. It plays on fear,' Macron said... Opinion polls appeared to show the 39-year-old Macron, a political novice who has never held elected office but who has soared to become a favorite to enter the Elysee, was already benefiting from the new-born alliance announced on Wednesday."

French (to German) bond spreads narrowed Wednesday on prospects for a Macron/Bayrou alliance to counter Le Pen. This development, however, didn't slow the melt-up in German bund prices or, for that matter, the rally in Treasuries, gilts and safe haven bonds more generally. And it didn't stop a sell-off in European bank stocks that seemed behind the late-week underperformance in U.S. and global financial stocks.

A Friday Reuters headline caught my attention: "Global Stocks Fall, Bond Markets Rally as Trump Optimism Pauses." I have a difficult time with the notion of "Trump optimism" fueling international equities. Rather, it's too much "money" (liquidity) chasing highly speculative markets in stocks, bunds, Treasuries, gilts, JGBs, corporates and EM debt. This same fuel has been behind gold and silver's 9% and 15% y-t-d gains.

It's a Theme 2017 that markets are unprepared for what would be a surprising change in the global monetary backdrop. I expect both the BOJ and ECB to at some point this year begin developing strategies for significantly reducing QE liquidity injections. Clearly, the Germans are contemplating a year-end conclusion to ECB QE operations.

February 23 - Reuters (Francesco Canepa): "Germany's central bank posted its smallest profit in more than a decade in 2016 as it set aside more money against potential losses on the bonds it is buying as part of the European Central Bank's stimulus programme... The Bundesbank recorded a net profit of 399 million euros, the lowest since 2004 and a sharp drop from the 3.2 billion euros bagged in 2015... Commenting on the results, Bundesbank president Jens Weidmann said it was right for the ECB to discuss closing the door to a further policy easing in the future."

February 23 - Bloomberg (Carolynn Look and Manus Cranny): "Investor expectations for an interest-rate increase by the European Central Bank in 2019 aren't totally unjustified as downside risks to the economic outlook recede, according to Bundesbank President Jens Weidmann... Accelerating inflation and a strengthening economic outlook have fanned a debate in the 19-nation euro area about the appropriate degree of stimulus as central banks prepare for a policy shift. While officials including Weidmann are arguing that the time to talk about an exit is coming closer, ECB President Mario Draghi contends that record low rates and a 2.28 trillion-euro ($2.4 trillion) quantitative-easing plan are still necessary to produce a sustained pickup in inflation... While Weidmann conceded that the ECB is right to keep monetary policy accommodative, he criticized the Governing Council's decision to extend QE through the end of 2017. 'I was not very supportive of that step... The monetary-policy stance that I would have been willing to accept is less expansionary than the current one.' One can certainly ask 'when we might slow down monetary policy and whether the ECB Governing Council shouldn't make its communication more symmetrical beforehand, for instance by not only pointing to the fact that monetary policy could be even more expansionary.'"

Angela Merkel appears increasingly vulnerable heading into October elections. Responding to criticism from a Trump advisor, Merkel this week commented: "We have at the moment in the euro zone of course a problem with the value of the euro. The ECB has a monetary policy that is not geared to Germany, rather it is tailored from Portugal to Slovenia or Slovakia. If we still had the D-Mark it would surely have a different value than the euro does at the moment."

February 23 - Reuters (Francesco Canepa): "Exclusive: ECB seeks to lend out more bonds to avert market freeze - sources: The European Central Bank is looking for ways to lend out more of its huge pile of government debt to avert a freeze in the 5.5 trillion-euro short-term funding market that underpins the financial system, central bank sources told Reuters. The ECB has bought more than a trillion euros ($1.06 trillion) of euro zone government bonds in a bid to shore up economic growth and inflation in the euro zone... By doing so, it has taken away the key ingredient for repurchase agreements, or repos, whereby financial firms lend to each other against collateral, typically high-rated government bonds such as Germany's... Germany, the only large euro zone country with a top-notch credit rating, is where the problem is at its most severe."

Will the Merkel government and Weidmann Bundesbank finally craft a more aggressive strategy for reining in Mario Draghi? Securities financing markets are already under heightened strain, as ECB purchases ensure an ever-dwindling supply of German debt in the marketplace. Again this week, there was talk of heightened stress and dislocation in the crucial "repo" marketplace. And while German influence over the ECB has waned throughout Draghi's term, the Bundesbank holds a commanding position over the (by far) most dominant securities in the euro zone: "AAA" German debt. At this point, there's a case to be made that German bunds are more critical to global securities funding, leveraged speculation and derivatives markets than even Treasuries.

ECB policymaking is increasingly at odds with German interests. I hold the view that German officials have more power to impose their will than is appreciated in today's complacent markets. I question whether it was coincidence that Mr. Weidmann publically voiced comments critical of ECB policy concurrent with a dislocation in bund trading and associated "repo" market stress. Moreover, I wouldn't suggest owning risk assets anywhere in the world if European securities financing markets begin to malfunction.

Here at home, perhaps the markets will begin questioning the new Administration's priorities (along with the ability to get those priorities through Congress). The markets are bullishly positioned in anticipation of a string of tax cuts, deregulation and infrastructure spending. I'm not sure how encouraging markets should find White House chief strategist Steve Bannon's "three buckets" - "national security and sovereignty," "economic nationalism" and the "deconstruction of the administrative state," along with his comment "...one of the most pivotal moments in modern American history was [Trump's] immediate withdraw from TPP. That got us out of a trade deal and let our sovereignty come back to ourselves." It's also worth mentioning that President Trump spent more time at CPAC trumpeting military buildup than offering details for tax reform and deregulation.

February 24 - Reuters (Emily Stephenson and Steve Holland): "President Donald Trump said he would make a massive budget request for one of the 'greatest military buildups in American history' on Friday in a feisty, campaign-style speech extolling robust nationalism to eager conservative activists. Trump used remarks to the Conservative Political Action Conference (CPAC)... to defend his unabashed 'America first' policies. Ahead of a nationally televised speech to Congress on Tuesday, Trump outlined plans for strengthening the U.S. military... and other initiatives such as tax reform and regulatory rollback. He offered few specifics on any initiatives, including the budget request that is likely to face a harsh reality on Capitol Hill... Trump said he would aim to upgrade the military in both offensive and defensive capabilities, with a massive spending request to Congress that would make the country's defense 'bigger and better and stronger than ever before.' 'And, hopefully, we'll never have to use it, but nobody is going to mess with us. Nobody. It will be one of the greatest military buildups in American history...'"

 


For the Week:

The S&P500 added 0.7% (up 5.7% y-t-d), and the Dow gained 1.0% (up 5.4%). The Utilities surged 4.1% (up 5.4%). The Banks slipped 0.4% (up 4.4%), and the Broker/Dealers fell 1.9% (up 7.6%). The Transports declined 0.8% (up 4.2%). The S&P 400 Midcaps were little changed (up 4.6%), while the small cap Russell 2000 slipped 0.4% (up 2.8%). The Nasdaq100 added 0.3% (up 9.9%), and the Morgan Stanley High Tech Index increased 0.5% (up 11.5%). The Semiconductors dipped 0.3% (up 7.4%). The Biotechs dropped 2.3% (up 10.0%). Though bullion jumped $22, the HUI gold index fell 3.8% (up 13.2%).

Three-month Treasury bill rates ended the week at 50 bps. Two-year government yields fell five bps to 1.15% (down 5bps y-t-d). Five-year T-note yields dropped 10 bps to 1.81% (down 12bps). Ten-year Treasury yields fell 10 bps to 2.31% (down 13bps). Long bond yields declined nine bps to 3.06% (down 1bp).

Greek 10-year yields sank 64 bps to 7.08% (up 6bps y-t-d). Ten-year Portuguese yields fell nine bps to 3.94% (up 19bps). Italian 10-year yields were about unchanged at 2.20% (up 38bps). Spain's 10-year yields rose six bps to 1.70% (up 32bps). German bund yields sank 12 bps to 0.19% (down 2bps). French yields dropped 11 bps to 0.93% (up 27bps). The French to German 10-year bond spread widened one to 74 bps. U.K. 10-year gilt yields dropped 13 bps to 1.08% (down 16bps). U.K.'s FTSE equities index declined 0.8% (up 1.4%).

Japan's Nikkei 225 equities index added 0.3% (up 0.9% y-t-d). Japanese 10-year "JGB" yields were down three bps to 0.07% (up 3bps). The German DAX equities index increased 0.4% (up 2.8%). Spain's IBEX 35 equities index declined 0.5% (up 1.1%). Italy's FTSE MIB index fell 2.2% (down 3.3%). EM equities were mixed. Brazil's Bovespa index fell 1.6% (up 10.7%). Mexico's Bolsa slipped 0.2% (up 3.1%). South Korea's Kospi increased 0.7% (up 3.3%). India's Sensex equities index jumped 1.5% (up 8.5%). China's Shanghai Exchange gained 1.6% (up 4.8%). Turkey's Borsa Istanbul National 100 index fell 0.6% (up 13.0%). Russia's MICEX equities index dropped 1.7% (down 6.3%).

Junk bond mutual funds saw inflows of $726 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates slipped a basis point to 4.16% (up 54bps y-o-y). Fifteen-year rates gained two bps to 3.37% (up 44bps). The five-year hybrid ARM rate declined two bps to 3.16% (up 37bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down six bps to 4.28% (up 58bps).

Federal Reserve Credit last week declined $0.8bn to $4.424 TN. Over the past year, Fed Credit fell $24.0bn (down 0.5%). Fed Credit inflated $1.613 TN, or 57%, over the past 224 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $12.3bn last week to $3.181 TN. "Custody holdings" were down $72.8bn y-o-y, or 2.2%.

M2 (narrow) "money" supply last week was little changed at $13.291 TN. "Narrow money" expanded $827bn, or 6.6%, over the past year. For the week, Currency was unchanged. Total Checkable Deposits jumped $29.4bn, while Savings Deposits fell $30.4bn. Small Time Deposits declined $0.9bn. Retail Money Funds gained $2.9bn.

Total money market fund assets gained $5.2bn to $2.680 TN. Money Funds fell $98bn y-o-y (3.5%).

Total Commercial Paper increased $1.9bn to $967bn. CP declined $109bn y-o-y, or 10.1%.

Currency Watch:

The U.S. dollar index was little changed at 101.09 (down 1.3% y-t-d). For the week on the upside, the Mexican peso increased 2.6%, the South Korean won 1.3%, the South African rand 0.7%, the Japanese yen 0.6%, the British pound 0.4%, the New Zealand dollar 0.4% and the Australian dollar 0.2%. For the week on the downside, the Swedish krona declined 1.4%, the euro 0.5%, the Swiss franc 0.5%, the Norwegian krone 0.4% and the Brazilian real 0.3%. The Chinese yuan was about unchanged versus the dollar this week (up 1.1% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index slipped 0.3% (up 0.8% y-t-d). Spot Gold rose 1.8% to $1,257 (up 9.1%). Silver jumped 2.0% to $18.41 (up 15%). Crude increased 59 cents to $53.99 (up 0.3%). Gasoline was about unchanged (down 9%), and Natural Gas fell 1.7% (down 26%). Copper declined 0.9% (up 8%). Wheat fell 1.6% (up 10%). Corn dropped 1.3% (up 5%).

Trump Administration Watch:

February 24 - Reuters (Steve Holland and David Lawder): "President Donald Trump declared China the 'grand champions' of currency manipulation on Thursday, just hours after his new Treasury secretary pledged a more methodical approach to analyzing Beijing's foreign exchange practices. ...Trump said he has not 'held back' in his assessment that China manipulates its yuan currency, despite not acting on a campaign promise to declare it a currency manipulator on his first day in office. 'Well they, I think they're grand champions at manipulation of currency. So I haven't held back,' Trump said. 'We'll see what happens.' During his presidential campaign Trump frequently accused China of keeping its currency artificially low against the dollar to make Chinese exports cheaper, 'stealing' American manufacturing jobs."

February 20 - Wall Street Journal (Kate Davidson and Ryan Tracy): "President Donald Trump will be able to recast the Federal Reserve by filling three or more vacancies on its seven-member board of governors, and is leaning toward candidates with banking and financial world experience rather than academic economists. After his campaign criticism of the central bank's low-interest-rate policies, many observers speculated he would seek more 'hawkish' candidates who would favor higher borrowing costs. But his choices may be driven less by these issues and more by their practical experience, judging from his early picks for other top economic policy posts in the administration... So far, his team is prioritizing the search for candidates to fill the role of vice chairman for supervision and a seat for someone with a community banking background, as required by law."

February 24 - Reuters (Steve Holland): "U.S. President Donald Trump on Thursday spoke positively about a border adjustment tax being pushed by Republicans in Congress as a way to boost exports... Trump, who has lashed out at U.S. companies for moving operations and jobs to countries such as Mexico, had previously sent mixed signals on the proposal at the heart of a sweeping Republican plan to overhaul the tax code. 'It could lead to a lot more jobs in the United States,' Trump told Reuters in an interview, using his most approving language to date on the proposal."

China Bubble Watch:

February 22 - Financial Times (Gabriel Wildau): "China's central bank has drafted new rules to tackle risks from shadow banking, in a tacit acknowledgment that a host of measures in recent years to control off balance sheet credit have failed to control its risks. New credit hit a record high in January, mostly due to lending by non-bank institutions. UBS estimates that China's ratio of debt to gross domestic product hit 277% at the end of 2016, up 133 percentage points since the global financial crisis. Non-bank lending has grown the fastest. Banks have worked with other financial institutions to shift loans off balance sheet, allowing them to evade credit quotas and capital adequacy requirements... Chinese banks' off balance sheet wealth management products (WMPs) exceeded Rmb26tn ($3.8tn) by the end of 2016, up 30% from a year earlier, compared with 10% growth for bank loans, the PBoC said."

February 23 - Bloomberg (Steve Holland and David Lawder): "China has appointed Guo Shuqing as the new head of the banking regulator.... Having spent much of his life working on transforming the nation's financial system, Guo, 60, faces daunting tasks ahead as he takes on oversight of the world's largest banking industry by assets... Shadow banking is now in every segment of China's financial system... The central bank and the securities, banking and insurance regulators are drafting new rules for asset-management products that have swollen to almost $9 trillion as of June 30. So-called wealth-management products issued by banks surged 30% last year, making them the largest component of the banking system that exists largely outside of lenders' balance sheets."

February 21 - Bloomberg: "China's financial regulators are working together to draft sweeping new rules for the country's rapidly-expanding asset-management products that aim to make it clear there's no government guarantees on such investments, according to people familiar... The draft rules would apply to products issued by banks, insurers, brokerages and other financial institutions... The rules would be phased in after existing products mature, and would only apply to new issues, they added. Households and companies have poured into asset management products, seeking higher returns than bank deposits can offer. On the other side, banks have created off-balance sheet vehicles to provide such offerings, then channeled funds to riskier borrowers who pay higher interest rates. Most recently, financial institutions have invested in each other's products, leading to a potential chain reaction in the event of a default. An industry managing assets worth more than three-quarters of China's $11 trillion gross domestic product has thus blossomed, underpinned by assumptions on all sides that the government would prevent failures should investments sour... 'Regulators are trying to defuse a bomb,' said Xia Le, Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA. 'Shadow banking is an important source of financing to small and private companies and property developers, and the tightening measures will weigh on economic growth in the short term.' ... China's asset-management products totaled about 60 trillion yuan ($8.7 trillion) as of June 30..."

February 19 - Bloomberg (Stephen Spratt): "Chinese banks had more than 26 trillion yuan ($3.8 trillion) of wealth-management products held off their balance sheets at the end of December, a 30% increase from a year earlier, according to the central bank. The expansion of this form of shadow banking, with money eventually being diverted to quasi-loans and bonds, outpaced the 10% growth for normal lending during the same period, raising risks for the broader economy and undermining the country's 'deleveraging' efforts, the People's Bank of China said... The central bank is including off-balance sheet WMPs in its so-called macro prudential assessment framework starting this quarter to better gauge the expansion of credit and potential risks in the financial system."

February 21 - Bloomberg (Kevin Yao): "China's central bank said... that it will extend a preferential scheme for some banks that will free up additional funds for lending, as long as they channel money to weaker, cash-starved sectors of the economy. But it also warned that some banks will no longer enjoy such preferential treatment after a recent review found they had failed to adhere to 'standards' intended to channel loans more directly to rural areas and small companies."

February 23 - Wall Street Journal (LingLing Wei and Chun Han Wong): "President Xi Jinping is shaking up his economic team ahead of a major power shuffle as China battles rising financial risks at home and friction with its trading partners. The change, according to people familiar..., involves China's top banking regulator, the commerce minister and the top economic-planning official, who have all reached the retirement age of 65. Slated to succeed them are two close associates of Mr. Xi and a well-known technocrat, the people said. The shakeup, expected to be made public within days, was decided on at a Tuesday meeting of the Communist Party's Politburo hosted by Mr. Xi..."

February 22 - Bloomberg: "China home prices increased last month in the fewest cities in a year, signaling property curbs to deflate a potential housing bubble are taking effect. New-home prices, excluding government-subsidized housing, gained last month in 45 of the 70 cities tracked by the government, down from 46 in December... Prices fell in 20 cities and were unchanged in five. Chinese authorities have expanded curbs on home purchases and tightened restrictions on property lending in an attempt to avoid a housing bubble and reduce financial risks."

February 22 - Bloomberg (Narae Kim and Carrie Hong): "China's public-private-partnerships might be pushing more debt on to the state. While PPPs should largely be financed privately, the bulk of funding in China comes from government entities, according to Bank of America Merrill Lynch strategists. This means the market may be underestimating the government's debt level and inflation risk while overestimating its ability to sustain stimulus and maintain stability of the yuan, they said. 'We expect that most PPP investment may ultimately transpire as government debt, similar to those undertaken by local government funding vehicles, through the muni-bond program,' BofAML's David Cui... wrote... The low returns of PPPs, which are mostly used for infrastructure projects, limit their appeal to private investors. Of the 2.35 trillion yuan ($342 billion) in PPP projects awarded in China last year, 74% went to state-owned enterprises..."

February 22 - Bloomberg: "The chairman of China's top insurance regulator vowed to impose 'stringent' rules and 'severely' punish short-term speculation by insurers, the latest sign of tightening controls on the nation's industry... Insurers shouldn't attempt to interfere in the management of listed companies, Xiang said. The CIRC 'will never allow insurance to become a rich man's club, let alone allow financial crocodiles to use insurance as their channel or hideout,' Xiang said. Any insurer that 'challenges the regulatory bottom line, tarnishes the industry's image or harms the people's interest' will be driven out of the market, he said."

February 21 - Financial Times (Gabriel Wildau and Ma Nan): "At least 180 Chinese listed companies will be forced to cancel or scale back planned rights offerings worth $97bn in response to regulations that target excessive fundraising used for dubious acquisitions and financial speculation. The rules come as Chinese regulators are increasingly concerned about the trend of 'exit the real, enter the fake' — a phrase used to denote companies abandoning real economic activity in favour of financial engineering. Listed companies invested a record $110bn into passive financial products in 2016 even as fixed-asset investment grew at its slowest pace since 1999. China's securities regulator on Friday issued regulations that restrict the use of secondary share offerings through private placements."

Global Bubble Watch:

February 20 - Financial Times (Mehreen Khan): "Here we go again. The premium investors are demanding to hold French over German 10-year debt has hit a fresh post-eurozone crisis high today - exceeding 0.81 percentage points for the first time since August 2012. The yield gap has swollen to its highest in over four years this month... France's 10-year bond yield - which reflects the government's borrowing costs - leapt 7 bps today to 1.1% after latest polls show the far-right Marine Le Pen is on course to emerge as a clear winner in the first round vote held in late April."

February 20 - Bloomberg (Stephen Spratt): "Hidden under the surface of European bond markets, traders are placing bets that will pay out if the risks in the euro zone severely escalate. Markets across the continent have started to price in the increased potential for anti-euro candidates to win elections in France and Italy. Recent positioning in German and Italian bonds are hedges against a blow-up in the risk of a breakup in the common currency... Six-month German securities have rallied more than benchmark tenors this month and open interest in two-year note futures has surged, suggesting investors are building up long positions in assets that are the closest to cash in terms of safety. The yield spread between Italian low- and high-coupon bonds has widened as traders bet against the latter, which would fall much more if the country's creditworthiness is called into question."

February 21 - Bloomberg: "In China's manufacturing heartland Guangdong, clock maker Dannol Electronics Co. is grappling with higher input costs stemming from tougher environmental regulations. Already squeezed by years of rising wage bills and intensifying domestic competition, the company recently increased asking prices by an average of 15% for new customers and plans to do the same with older buyers soon. A wall clock featuring Manchester United's logo is now priced at $5.80 for wholesalers, up from $4.80 a year ago. 'All prices have gone up and inflation is intensifying,' said senior sales representative Fan Miaochang. 'As a manufacturer, we can't just bear the cost ourselves.'"

Brexit Watch:

February 23 - Reuters (Tim Ross): "U.K. lawmakers in Prime Minister Theresa May's Conservative party hit back at claims from Austrian Chancellor Christian Kern that Britain will be charged 60 billion euros ($63bn) to leave the European Union as tensions surge ahead of Brexit talks. In a Bloomberg interview..., Kern became the first EU leader to put a value on the size of the U.K.'s Brexit bill. While May's office was muted in its public comments, Kern's warning that there would be 'no free lunch' for the U.K. sparked a furious response from senior members of Parliament."

Greece Watch:

February 23 - Reuters (Michelle Martin): "Around half of Germans are against granting debt relief to Greece and around three in 10 want the debt-laden country to quit the euro zone, a survey showed... The INSA poll for the newspaper Bild showed 46.4% of people living in Germany, Europe's paymaster, thought giving Greece debt relief would be unfair for other euro zone countries."

Europe Watch:

February 22 - Bloomberg (Vassilis Karamanis): "Investors in the euro are getting increasingly concerned about the risks surrounding the French presidential elections, pricing in the options market shows. The premium needed to protect against swings in the single currency has now risen to the highest this year, while put options are the most expensive in relation to calls in almost two years. Specifically, investors seem most preoccupied with risks surrounding the second round of elections scheduled for May 7... The increase in options pricing reflects concern that National Front candidate Marine Le Pen may prove opinion polls wrong -- as happened with the outcome of the U.K.'s referendum on the European Union -- to become president."

February 18 - Reuters (Noah Barkin and Andrea Shala): "German Chancellor Angela Merkel suggested... that the euro was too low for Germany but made clear that Berlin had no power to address this 'problem' because monetary policy was set by the independent European Central Bank. Merkel made her remarks at the Munich Security Conference as U.S. Vice President Mike Pence looked on. They seemed aimed at addressing recent criticism from a top trade adviser to President Donald Trump, who has accused Germany of profiting from a 'grossly undervalued' euro. 'We have at the moment in the euro zone of course a problem with the value of the euro,' Merkel said in an unusual foray into foreign exchange rate policy. 'The ECB has a monetary policy that is not geared to Germany, rather it is tailored (to countries) from Portugal to Slovenia or Slovakia. If we still had the (German) D-Mark it would surely have a different value than the euro does at the moment. But this is an independent monetary policy over which I have no influence as German chancellor.'"

February 21 - Bloomberg (Carolynn Look): "The euro area's unexpectedly upbeat economic data on Tuesday might have come with more than one positive message. A gauge for economic activity rose to the highest level in almost six years in February, following previous signals that the region's frail recovery is finally taking shape. National gauges showed France outpacing Germany for the first time since 2012 -- a development that could signal growth in the 19-nation region is becoming more broad-based."

Fixed-Income Bubble Watch:

February 23 - Financial Times (Dan McCrum and Thomas Hale): "For footloose international money, the safest place to hide in the European financial system may be two-year German debt. The idea that Europe's largest economy could not meet such obligations in euros is as close to inconceivable as things get. The debt is also easy and cheap to trade, which means it can be a market signal of investor angst. The price of such safety set a record on Wednesday, with buyers accepting a loss of as much as 0.92% a year... When it comes to the sovereign bond market, there are also multiple reasons for the yield on the two-year German bond, known as the Schatz, to be so far below zero. 'The 2-year bond is the other side of lots of trades,' says Michael O'Sullivan, chief investment officer for international wealth management at Credit Suisse."

U.S. Bubble Watch:

February 22 - Reuters (Lucia Mutikani): "U.S. home resales surged to a 10-year high in January as buyers shrugged off higher prices and mortgage rates, signaling rising confidence in the economy and bolstering expectations of a pickup in growth in the first quarter. The National Association of Realtors' report... came as the labor market nears full employment and investors wait for the Trump administration to act on its promises to cut taxes, increase infrastructure spending and reduce regulations."

February 21 - Bloomberg (Julie Verhage): "Peak optimism is fast approaching. Goldman Sachs Group Inc. says the surge in confidence following Donald Trump's November victory is reaching an inflection point. Investors counting on tax cuts and an economic boom to fuel a surge in corporate profits are getting ahead of themselves, according to the bank. 'Financial market reconciliation lies ahead,' David Kostin, Goldman's chief U.S. equity strategist, wrote...The 'S&P 500 Index will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tailwind to corporate earnings than originally expected.' Kostin and his team pointed out that while corporate earnings estimates for 2017 have fallen by 1% since the election, the S&P has surged 10%."

February 21 - Wall Street Journal (Laura Kusisto): "Swelling supplies of apartment units are prompting big banks to pull back from new projects, forcing developers to scramble for capital, in a sign that the U.S. apartment industry headed for a downturn. The apartment sector... has been a winning bet for investors since the housing crash, as the economy recovered and more renters sought out units. Since 2010, average U.S. apartment rents have increased by 26%, according to... MPF Research... But fresh supply is beginning to overwhelm demand. More than 378,000 new apartments are expected to be completed in 2017, a 30-year high... In the fourth quarter of last year, 88,000 units were completed but only 50,000 of those were rented by tenants, according to MPF. 'Our business has radically changed,' said Toby Bozzuto, president and chief executive of the Bozzuto Group, which owns or manages 59,000 apartments... 'I haven't seen anything this seismically different since 2008, when credit dried up.' Now banks are in retreat, forcing developers to look to nontraditional lenders..."

Central Banker Watch:

February 18 - Reuters (Erik Kirschbaum): "European Central Bank board member Sabine Lautenschlaeger has said the ECB needs to wait to see if inflation stabilizes in its target zone of just under 2% before interest rates can be raised, but that she hopes its bond-buying program can be scaled down before year-end. Euro zone consumer prices were up by an annual 1.8% in January, the highest rate since February 2013..."

Japan Watch:

February 21 - Nikkei Asian Review (Keidai Sanda): "The Bank of Japan is straining to bend an unruly yield curve to its policy goal, sowing doubts among bond market participants that could make for more trouble ahead. Thankfully for an anxious BOJ, U.S. President Donald Trump did not raise the subject of the yen at his summit with Japanese Prime Minister Shinzo Abe earlier this month. Stung by criticism that Japan deliberately uses monetary easing to weaken its currency, the central bank had feared such a confrontation. Yet the past month has proven volatile enough in the domestic bond market. The 10-year Japanese government bond yield went for a wild ride Feb. 3 after the BOJ kept its bond buying at the same level as the previous round, despite mounting upward pressure on yields from rising U.S. interest rates. The upswing in U.S. yields in turn owes to Trump's bold proposals for infrastructure spending and tax cuts."

EM Watch:

February 21 - Bloomberg (Julie Verhage): "U.S. President Donald Trump has supported many policies that could harm emerging market economies. But investors are betting that his bark will turn out to be worse than his bite. More than $7 billion has poured into exchange-traded funds tracking emerging market stocks and bonds this year through Feb. 19..."

Leveraged Speculation Watch:

February 21 - Bloomberg (Dani Burger): "Hedge funds can't get enough of momentum -- even if it means embracing an investing strategy they hate. Loosely defined as betting on shares that went up the fastest over the preceding nine-to-12 months, hedge funds are the most reliant on momentum strategies since at least 2010, according to an Evercore ISI... Meanwhile, they've reduced their bearish bet on value stocks, which are priced at deep discounts to earnings and assets, for the first time in nine quarters, the study shows. Investors rarely take on momentum and value positions at the same time, which is what's happening now."

February 21 - Bloomberg (Dani Burger): "Hedge funds largely failed in their legal challenge to the U.S. government's capture of billions of dollars in profits generated by Fannie Mae and Freddie Mac after their bailout, sending shares of the mortgage guarantors plunging. Perry Capital LLC, the Fairholme Funds and other big investors lost a bid to overturn a judge's ruling that said they can't sue the government over the dividend change. The change known as the 'net-worth sweep' forced the companies to send almost all their profits to the U.S. Treasury, leaving shareholders with nothing..."

Geopolitical Watch:

February 18 - Reuters (Matthew Tostevin): "A United States aircraft carrier strike group has begun patrols in the South China Sea amid growing tension with China over control of the disputed waterway and concerns it could become a flashpoint under the new U.S. administration. China's Foreign Ministry... warned Washington against challenging its sovereignty in the South China Sea. The U.S. navy said the force, including Nimitz-class aircraft carrier USS Carl Vinson, began routine operations in the South China Sea on Saturday."

February 22 - Reuters (Idrees Ali): "China, in an early test of U.S. President Donald Trump, has nearly finished building almost two dozen structures on artificial islands in the South China Sea that appear designed to house long-range surface-to-air missiles, two U.S. officials told Reuters. The development is likely to raise questions about whether and how the United States will respond, given its vows to take a tough line on China in the South China Sea. China claims almost all the waters, which carry a third of the world's maritime traffic... Trump's administration has called China's island building in the South China Sea illegal. Building the concrete structures with retractable roofs on Subi, Mischief and Fiery Cross reefs... could be considered a military escalation, the U.S. officials said in recent days..."

February 22 - Reuters (Paul Carrel and Holger Hansen): "His only experience of governing in Germany is as a town mayor. She is Europe's most powerful leader. Yet Martin Schulz wants to end Angela Merkel's 11-year run as chancellor and fundamentally shift Germany's role in Europe. He might just pull it off. Schulz has revitalized his Social Democrats' (SPD) fortunes since they nominated him last month to challenge Merkel in a Sept. 24 federal election, narrowing a popularity gap with her conservatives... One year Merkel's junior at 61, Schulz is the former president of the European Parliament. While she has a doctorate in physics, he left school without his final exams before working his way up through local politics and on to Brussels. He brings oratory and a common touch she cannot match."

February 23 - Reuters (Steve Holland and David Lawder): "Germany's Social Democrats have overtaken Chancellor Angela Merkel's conservatives in an opinion poll by Infratest dimap for the first time since October 2006, with seven months to go before a federal election. The survey for German broadcaster ARD put the SPD, which has gained strength since nominating former European Parliament President Martin Schulz as its candidate, on 32% while Merkel's conservative bloc was on 31%."

 


 

Doug Noland

Author: Doug Noland

Doug Noland
Credit Bubble Bulletin

Doug Noland

I just wrapped up 25 years (persevering) as a "professional bear." My lucky break came in late-1989, when I was hired by Gordon Ringoen to be the trader for his short-biased hedge fund in San Francisco. Working as a short-side trader, analyst and portfolio manager during the great nineties bull market - for one of the most brilliant individuals I've met - was an exciting, demanding and, in the end, a grueling and absolutely invaluable learning experience. Later in the nineties, I had stints at Fleckenstein Capital and East Shore Partners. In January 1999, I began my 16 year run with PrudentBear, working as strategist and portfolio manager with David Tice in Dallas until the bear funds were sold in December 2008.

In the early-nineties, I became an impassioned reader of The Richebacher Letter. The great Dr. Richebacher opened my eyes to Austrian economics and solidified my lifetime passion for economics and macro analysis. I had the good fortune to assist Dr. Richebacher with his publication from 1996 through 2001.

Prior to my work in investments, I worked as a treasury analyst at Toyota's U.S. headquarters. It was working at Toyota during the Japanese Bubble period and the 1987 stock market crash where I first recognized my love for macro analysis. Fresh out of college I worked as a Price Waterhouse CPA. I graduated summa cum laude from the University of Oregon (Accounting and Finance majors, 1984) and later received an MBA from Indiana University (1989).

By late in the nineties, I was convinced that momentous developments were unfolding in finance, the markets and policymaking that were going unrecognized by conventional analysis and the media. I was inspired to start my blog, which became the Credit Bubble Bulletin, by the desire to shed light on these developments. I believe there is great value in contemporaneous analysis, and I'll point to Benjamin Anderson's brilliant writings in the "Chase Economic Bulletin" during the Roaring Twenties and Great Depression era. Ben Bernanke has referred to understanding the forces leading up to the Great Depression as the "Holy Grail of Economics." I believe "The Grail" will instead be discovered through knowledge and understanding of the current extraordinary global Bubble period.

Disclaimer: Doug Noland is not a financial advisor nor is he providing investment services. This blog does not provide investment advice and Doug Noland's comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. The Credit Bubble Bulletins are copyrighted. Doug's writings can be reproduced and retransmitted so long as a link to his blog is provided.

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